Analysis: After California pump price spike, NY heating oil could be next

NEW YORK (Reuters) - Fuel price shocks that had Californians gasping at record high pump prices over $5 a gallon may next hit heating oil users in New York, where depleted supplies and new green regulations could push bills up sharply this winter.

This year, new state environmental regulations require heating oil users in New York to fill their furnaces with the same diesel used by trucks and other motor vehicles for the first time.

But a string of East Coast refinery closures have cut supplies of the motor fuel in and around New York to a third below the level of last October. They now stand at the lowest level for this month since 2008. An icy spell in the Northeast, the world's biggest heating oil market, could lead to price spikes for consumers who caught a break last year from the fourth mildest winter on record.

The average cost of heating oil in New York is already 8 percent above levels seen this time last year at $4.08 a gallon, according to state officials.

"If we get a real cold spell this winter we'll see spot heating oil prices go to $5 a gallon," said Philip K. Verleger, an oil market economist who advised both the Carter and Ford administrations.

The scenario echoes the recent shock motorists have faced at the pumps in California, where refinery outages drove prices in some parts of the Golden state above $5 a gallon.

Refining problems in both regions are boosting prices even as crude oil prices are steady, with international Brent crude oil prices at almost exactly the same level as this time last year.

"A rush by northeast heating oil users to react to the cold weather could push prices up," Adam Sieminski, the head of the EIA, said on Wednesday. "I'm actually a little concerned about that."

Even if diesel and heating oil prices remain relatively stable in the Northeast, colder weather alone could add $400 to the average homeowner's heating oil bill this winter, the U.S. Energy Information Administration's Winter Fuels Outlook said on Wednesday. A price spike due to low inventories around New York would boost bills more.

Verleger said tight oil product inventories on the East Coast are already making fuel prices more volatile, noting that gasoline futures spiked nearly 30 cents a gallon during one frantic trading day at the end of September.

California gasoline prices surged to record highs after a series of refinery mishaps. Oil traders also suspected a short squeeze that forced refineries to buy fuel on the open market.

Concerns are growing that the East Coast could be susceptible to a similar squeeze this winter.

GREENER FUEL

New regulations that took effect in July mean homes and businesses in New York state are restricted to burning ultra-low sulfur heating oil in a bid to improve air quality in one of the most populous U.S. states.

The EIA estimated in a May report that New York's tighter fuel regulations will raise demand for ultra low-sulfur diesel by as much as 170,000 barrels per day (bpd) during the peak winter months. That's equal to 45 percent of existing ultra low-sulfur diesel demand on the East Coast, which averages 360,000 bpd.

At the same time, refining capacity supplying the East Coast has been cut by as much as 30 percent since 2009, as low margins forced companies to shut plants.

"You've got the unhappy situation where demand is increasing and supply is falling," said Mark Routt senior energy consultant at KBC in Houston.

"If we get a significant cold snap we could really see prices shoot higher, as right now the East Coast diesel market is not balanced."

Ultra low-sulfur diesel stocks in the Central Atlantic region, which includes New York, New Jersey and Pennsylvania, are a third below last year's level, according to EIA data. Stocks last year did not need to account for New York heating demand.

The impact of any diesel price spike this winter may also be felt far beyond the East Coast, as futures traders on Wall Street and around the New York Harbor delivery hub play an outsized role in setting national prices.

Record shipments abroad, which neared 1 million bpd in the first half of 2012 compared to just over 500,000 bpd in 2008, have clipped the amount of fuel available for inventories.

"The normal trend of a seasonal build in distillates stocks ahead of the winter months simply hasn't occurred," said Gareth Lewis-Davies, an analyst at BNP Paribas bank in London, adding that exports to Latin America were still high.

Financing for smaller firms holding oil stocks has also been constrained, as the European banks that used to dominate what is known as commodity trade finance have stepped back or exited the market in the face of the euro zone crisis.

"Low distillate stocks in the East Coast and Gulf Coast states, which provide over 60 percent of the Northeast's distillate (diesel and heating oil) supply, and the state of New York's switchover from higher sulfur heating oil ... all contribute to an expected tighter market this winter," said the EIA in its winter outlook on Wednesday.

SAFETY VALVES

Industry experts say the supply situation around New York is not yet critical.

With homes and businesses just starting to fire their boilers after a long summer, New York Oil Heating Association(NYOHA) CEO John Maniscalco said he has so far heard few concerns from his fuel suppliers around New York Harbor.

He said most businesses and homes buy heating oil when they need it, leading to surges in demand from last-minute buying when very cold weather hits. "In most cases the industry rises to the occasion and we can meet demand," Maniscalco said. There's no way of knowing what type of winter we're going to get, no one predicted the non-winter we had last year."

Supply relief could come from the giant U.S. Gulf Coast refining center, but it takes time to get diesel to New York. The Empire State is connected to the Gulf Coast via the Colonial Pipeline, which is already running at capacity. Deliveries take an average of 18.5 days to reach New York.

The New York heating oil law does have a provision allowing the state to switch back to burning higher sulfur fuels in the event of a price spike or severe supply shortage, but politicians said it would only be used in an emergency.

Such measures can have a quick impact on fuel costs. California pump prices fell 60 cents a gallon on Monday after Governor Jerry Brown announced service stations could sell less environmentally friendly winter fuels three weeks early.

In addition, oil companies could try and redirect diesel exports from Latin America to the East Coast when prices rise.

"(We) need to see higher prices in U.S. relative to other regions to encourage imports and to make exports look less attractive," said Lewis-Davies.

The Department of Energy maintains a home heating oil reserve in the Northeast, but cut it from 2 million barrels of higher-sulfur fuel to 1 million barrels of low-sulfur diesel in late 2011. The DOE website said the stocks were placed in New England instead of around New York Harbor because that region was viewed as well supplied.

Distillate stocks fell by 1.6 million barrels on the East Coast last week, the American Petroleum Institute said on Tuesday.

The dynamics of the Northeast distillate import market have shifted dramatically over the past few years. Total imports into nine Northeastern states fell by a third to just 33 million barrels last year, government data show; imports by New York fell by almost as much.

The list of importers has changed even more. Trading firms such as Morgan Stanley, Trafigura and Vitol once accounted for about a fifth of all imports with some 9 million barrels a year, according to a Reuters analysis of U.S. import data. Last year, companies that are not refineries and don't own retail outlets imported less than 2 million barrels, just 6 percent of the total.

"The whole Atlantic basin is going through a structural change," said Katherine Spector at Canadian Imperial Bank of Commerce in New York.

(Additional reporting by Matthew Robinson in New York; Editing by David Gregorio)